Co-lending assets under management (AUM) of non-banking financial companies¹ (NBFCs) is nearing ~Rs 1 lakh crore after more than 5 years since the model came into being. Over the medium term, growth momentum is seen healthy at 35-40% annually, amidst rising interests of partners - NBFCs as well as banks.

The partners, however, may increase their focus on other asset classes such as loans to micro, small and medium enterprises (MSME) and home loans given higher risk weights for personal loans.

A study² of ~100 NBFCs, accounting for over 90% of the sector’s AUM, indicates these trends. Interestingly, only about a third of these have active co-lending books at present.

Says Ajit Velonie, Senior Director, CRISIL Ratings, “Co-lending is seen as a win-win for NBFCs and banks alike, as it allows sharing of risk and rewards. For NBFCs, particularly for mid-sized and smaller ones, it enables access to bank funding as well as diversification in funding avenues. This becomes even more relevant in light of the recent increase in risk weights for bank lending to NBFCs. The model also allows NBFCs to grow in a capital-efficient manner. For banks, on the other hand, it provides optimal access to niche customers and geographies and also aids them in meeting their priority sector lending targets.”

Of the current overall co-lending book, personal loans alone account for about a third of the AUM, followed by housing loans at ~20% and unsecured MSME loans and gold loans each making up ~13% of the pie. Secured MSME (including loan against property) and vehicle loans comprise the rest ~20% (see chart in annexure).

While co-lending books for all asset classes will grow, the pace of growth for personal loans is expected to be slower than that seen in the recent past. This is because of the revision in the risk weight of unsecured consumer credit to 125% now from 100% earlier, which would lead to some moderation in growth for unsecured loans³ to 25-35% in fiscal 2025, from an estimated growth of ~35% in fiscal 2024.

Says Malvika Bhotika, Director, CRISIL Ratings, “With recalibration in growth of personal loans following increase in risk weights, the share of personal loan in the co-lending book could decline in fiscal 2025, and that of MSME and home loans should go up. This will be supported by government’s focus on increasing share of MSME sector contribution in India’s gross domestic product and ‘Housing for All’ initiatives. Net-net, co-lending will continue to see increased traction as NBFCs look for alternate funding sources to cater to the healthy demand for retail loans.”

Growth will also be supported by controlled asset quality seen so far in the co-lending portfolio of banks and NBFCs. While sustenance of asset quality will be the key to long term success of the co-lending business model, the manner in which regulations governing co-lending evolve will also bear watching.

¹ NBFCs refer to non-banking finance companies, including housing finance companies (HFCs) and microfinance institutions (NBFC-MFIs), but exclude government-owned NBFCs
² Our analysis includes the loan book co-originated by the players under the co-lending arrangement.
³ Unsecured loans include consumer loans (personal loans and consumer durable loans) and business loans to SMEs